Interest rates forecast to be higher for longer due to Budget

7 days ago

Tom Espiner

BBC business reporterShareSave

UK interest rates will fall more slowly than expected over the next two years due to October’s Budget, according to an influential think tank’s forecasts.

Although Budget measures would boost the economy in the short-term, changes to tax and spending would mean the cost of borrowing would fall more slowly, the Organisation for Economic Co-operation and Development (OECD) said.

The measures are also likely to push UK inflation, which measures how prices rise over time, above the rate seen in other major economies.

Chancellor Rachel Reeves welcomed the forecast, however, saying “growth is our number one priority”.

The OECD now expects the UK economy to grow more slowly this year than it forecast three months ago, before accelerating rapidly next year and slowing again in 2026.

• It expects 0.9% growth this year, down from 1.1%
• It predicts 1.7% next year, up from 1.2%
• In 2026, it expects 1.3% growth

Reeves said the upgrade in the growth forecast for 2025 “will mean the UK is the fastest growing European economy in the G7 over the next three years”.

She said Labour had not taxed people’s payslips at the Budget and that the government is “determined to deliver growth”.

In October, Reeves set out plans to increase public spending by nearly £70bn per year, funded through tax rises and more borrowing.

On Wednesday, the OECD said that UK interest rates, which currently stand at 4.75%, are expected to fall back to 3.5% by early 2026.

It said that this was partly due to higher than expected inflation.

The OECD’s economic predictions are released twice per year, and aim to give a guide about what is most likely to happen in the future. But they can be off the mark, and they do change.

Businesses use the estimates to help plan investments, and governments use them to guide policy decisions.